The Book Value (BV) of Berkshire Hathaway per 2017
AR (released 2/2018) is $211,750 per BRK.A share or $141.17 per BRK.B share
compared to $172,108 per BRK.A share or $114.74 per BRK.B share in the last AR.
The stock ended the year at $295,755 or 140% of BV - the premium over book
value has remained relatively steady over the last year as that percentage was
at 142% ($244,102 share price) EOY 2016. Buffett’s repurchase criterion is 120%
of BV or $254,100. The premium to book value remained somewhat steady as the
stock rose ~21% over the last year compared to book value growth of ~23%. Net
earnings are at $27,326 per BRK.A share. Excluding one-time gain due to tax
changes, the earnings are $9,659 per BRK.A share for a ttm-PE of ~31. This is
compared to a ttm-PE of ~17 last year and ~13 the year before.

Historical Book Value (BV) and Market Value Growth:

Book Value CAGR 1965-2017 is at 19.1% and for 2016 it is 23%.

Market Value CAGR 1965-2016 is at 20.9% vs 9.9% for S&P
500. For 2017, it is ~21% which is around the same as the performance of the S&P
500 index.

Earnings per Share (EPS):

Excluding one-time
tax gain, earnings at $9,659 for 207 vs $14,645 in 2016 vs $14,656 in 2015 vs
$12,092 in 2014 vs $11,850 in 2013 and $8,977 in 2012 per BRK.A
share. One-third decrease compared to marginal YOY increase last year and
21% YOY increase the year before. Roughly a third of Berkshire earnings are
realized gains (after tax) historically. For 2017, that figure was $1.4B.

Intrinsic Business Value:

Plans to continue building Berkshire’s per-share intrinsic
value by:

1.Focusing on increasing earning power at subsidiaries
both organically and through bolt-on acquisitions,

2.Growth of equity investments,

3.Repurchasing when there is meaningful discount to
intrinsic value,

4.Making acquisitions while rarely issuing new shares.

Co-Managers:

·2017: they now manage $25B. Teva Pharmaceuticals
positon is a purchase by one of them.

·2016: Together, they now manage $21B. Apple
& American Airlines were first established by one of them.

·2014: their roles were expanded to also include
running businesses - they took over as Chairman of one business each -
combined, those businesses are very small earning around $100M annually -
Buffett’s way of developing a deep-bench!

·2013: Todd Combs and Ted Weschler invested $7B
each and they outperformed Buffett in 2013.

Long-term economic goal:

Maximize average rate of gain in intrinsic business value on
a per share basis. Preference is to own a diversified group of businesses with
consistent above-average ROC and second choice is to own parts of such
businesses (security ownership of Berkshire’s insurance subsidiaries).

Look-through earnings relevance:

“Undistributed earnings of our investees, in aggregate, have
been fully as beneficial to Berkshire as if they had been distributed to us”.
So,

It is preferable to purchase
$2 of earnings that are not reportable rather than $1 of reportable
earnings for the same acquisition cost, and

Buffett dedicated a section basically discouraging investors
from using leverage.

Selling businesses:

No interest in selling good businesses Berkshire owns.
Sub-par businesses are also not sold as long as they are able to generate
at-least some cash and managers/labor relations are good. Capex decisions for
the latter are made in a much more cautious fashion compared to the former - it
is unlikely that sub-par businesses will see increased profitability with
increased spending.

BV growth vs S&P 500 Performance Comparison:

While this comparison is shown in the first page of the
Annual Letter, it has become less meaningful over time. The reasoning has to do
with how Berkshire’s business structure has evolved: equity holdings tend to
move with S&P 500 and that is now a much smaller portion of overall value.
Also S&P 500 gains are reported at 100% while Berkshire’s realized gains
get reported at 65% because of taxes.

Also, there is another major shortcoming with this comparison: The carrying
value of the businesses that are controlled by Berkshire is much more than
their carrying value and so the BV far understates Berkshire’s Intrinsic Value
(IV). But, IV by definition (discounted value of cash that can be taken out
during the remaining lifetime) is an estimate and so is not quoted in any of
the releases.

Below is a YoY comparison of Berkshire Hathaway’s largest equity investments:

·A huge increase in the Apple position and the
drop in the large stake in International Business Machines are the main changes.

·Bank of America is new in this year’s list as
their warrants at strike $7.14 were exercised.

·Bank of New York Mellon, BYD Company, and
General Motors came into the list as their market values have made them one of
the top investments in Berkshire’s portfolio. Sanofi, United Continental
Holdings and USG Corporation slipped out of the list for the same reason.
International Business Machines on the other hand was sold out.

Below is a comparison of Berkshire Hathaway's asset
distribution in the "Insurance and Other" area for the last three
years:

The equity exposure is at ~54%. Debt holdings have dropped
from ~21% in 2012 to just ~7% in 2017. Berkshire has been on record consistently to
state the relative valuation edge for equities compared to bonds in the current
low-interest rate environment. Cash on the other hand has gone up from 24% to
34%. It is probable that Berkshire would look to allocate some of that cash
this year.